Europe's Central Bank Faces Credibility Test

By

Brian Blackstone

July 2, 2011

FRANKFURT—The European Central Bank, still trying to restore its reputation after a series of policy reversals last year, will face a new test of its credibility in the coming weeks if it is forced to decide whether to cut Greek banks off from its funding facility.

At issue is whether Greek bond rollover proposals under consideration by the private sector and governments are deemed a default by rating agencies. If that occurs, ECB officials have warned Greek debt will be rejected as backing for the ECB loans that are crucial...